Bulgaria: The Headaches Of Starting A Small Business

Sofia, 21 April 1998 (RFE/RL) -- Small and medium size business is considered one of the spearheads of economic renewal in the transition economies. However, getting started in a business of one's own is often far from easy.

Take Bulgaria for example. According to Bojidar Danev, the chairman of the Bulgarian Business Association, a prospective independent businessman now needs a basic start-up capital of about $5,000. At todays exchange rate this is more than 9 million Bulgarian leva -- or almost 200 times a minimum salary.

And that's not the end of the expense. Another 5 million leva is needed to cover the cost of the registration procedure in the courts. Then there's the lawyers fee, the money to be paid for obtaining a company number at the Taxation Bureau and so forth. Altogether a budding businessman must find around $8,500, if he plans to open a coffee-shop, a bakery or something of the sort.

If one does not have such a large sum of money available on hand, credit must be sought, and that is an almost insurmountable problem in itself. Theoretically there are four legal possibilities, namely to obtain the money from a bank, from an international fund, from a foreign investor, or from a friend.

The normal source of credit is, of course, a bank. But in Bulgaria, the restrictive policy of the Bulgarian Currency Board has brought the banks down practically to the level of mere money-changers. Nobody forbids them to give credits -- even the interest rates are favorable, some 5 or 6 percent. But the conditions set for loans are murderous.

The law requires the minimum security for a bank-loan to be not less than 80 per cent. Yet the bankers, intimidated by the mountain of Ibad credits amassed in the past by state-owned enterprises, are demanding more than that, even up to 125 percent security. This means that if you want a loan of say 10 million leva, your insurance must be for 12.5 million! In practice this means that credits are available only to people who already have money.

Loans offered by international institutions are also disadvantageous, because of the high interest demanded by the Bulgarian banks which act as intermediaries. The credits granted to local banks by The World Bank for instance are with a reasonable 6 or 7 percent interest. But the interest the local banks demand from their customers runs to three times that level. The reason given is that vis-a-vis the foreigners, the local banks must carry the whole risk -- that is, they are obliged to be punctual and to pay back the installments of the loan to the international institution, regardless of the local debtors own performance.

But there may be some improvement in sight. With the good national economic results during the first quarter of this year -- there was a big budget surplus -- the Bulgarian government has seen its way clear to take a cautious step towards easing conditions for small and family businesses. Earlier this month new license taxes, 50 percent lower than the previous ones, were approved for craftsmen, traders and producers with an annual turnover below a certain level. The taxes payable are graded into various groups, those in villages and towns being considerably lower than in the big cities.